SAP Remains Vital Amid Ailing Market And Internal Adjustments Part 1: Recent Announcements

Event Summary

On January 31, at its Conference on Business Intelligence and Enterprise Portals in Leipzig, Germany, SAP AG (NYSE: SAP), a leading provider of business software solutions, announced the next generation of the mySAP Business Intelligence (mySAP BI) solution. Major enhancements to this solution are envisioned to enable companies to achieve true business intelligence by providing the business ability to deploy the access, analysis and delivery of any information, structured and unstructured, to anyone throughout the enterprise and beyond

To achieve this capability, mySAP BI includes the fully integrated mySAP Enterprise Portal, the portal technology from SAP Portals, Inc. This reportedly provides anyone inside and outside the business with the ability to quickly access and relate information from any source at any time through a capability called Business Unification. The offering also reportedly provides new capabilities for customers to completely integrate information from anywhere and supports the information exchange to any system in the enterprise. In addition, the offering provides new interactive access and broad deployment capabilities via the Web, mobile and offline devices, and the desktop to enable all business users to meet any of their decision-making needs.

SAP touts any individual can quickly access and relate information from any source through Drag&Relate functionality, which provides new levels of efficiency that should result in higher-quality relationships with employees, customers and suppliers. mySAP BI also features predefined business content for many business areas or industries, enabling organizations to rapidly deploy relevant information to any users so they can understand the performance of key success factors (KSFs), optimize operations and quickly adjust their actions. By leveraging industry standards such as XML, the new ability to use XML for Analysis might provide companies with the ability to integrate business intelligence into any e-business system.

The offering also includes integrated Crystal Decisions Crystal Reports for seamless operational reporting of more than 500 predefined report templates and the option to completely integrate with Ascential Datastage, which enables the rapid integration of data from other enterprise applications. The entire solution is managed through a sophisticated set of data warehouse management capabilities that can ensure the consistency and quality of information through the use of metadata leveraging the Common Warehouse Metadata Interchange (CWMI) industry standard. mySAP BI is distributed to 120 countries and supports every relevant language and foreign currency required by global companies.

This is Part One of a two-part News Analysis of recent SAP announcements, including Financial results.
Part Two will continue the analysis and make User Recommendations.

Subsidiaries to Combine

The news comes only a week after the January 23 announcement of SAP's intention to combine two of its subsidiaries, SAP Markets, Inc., and SAP Portals, Inc., into one yet to be named subsidiary dedicated to "the rapid delivery of integration technologies and collaborative applications that target heterogeneous system environments through the use of open standards". The combined company's solutions will be delivered by SAP to customers as part of mySAP Technology and other solutions, and also licensed to other technology companies for distribution with third-party software offerings.

The combined company will supposedly maintain the charter of providing an open integration technology that unifies people, content and business processes in heterogeneous environments and across business boundaries. Building on a single platform, which combines an enterprise portal with content management and exchange technology, the company will deliver a suite of business solutions for supplier relationship management, extended e-selling and business intelligence. In addition, the SAP subsidiary expects to expand the existing partnerships that SAP Markets and SAP Portals have with Commerce One, Inc. (NASDAQ: CMRC), and Yahoo! (NASDAQ: YHOO); consulting firms Accenture Ltd. (NYSE: ACN); Cap Gemini Ernst & Young and PwC Consulting; and others.

The combined company will have its headquarters in Palo Alto, it will employ more than 1,700 people worldwide, and share approximately 5,000 customers. Shai Agassi, current CEO of SAP Portals, will head the new company, while Hasso Plattner, CEO of SAP Markets (and co-CEO of SAP), will serve as chairman of the new company's board. Integration of the two subsidiaries is scheduled for completion by 31 March 2002.

Financial Results

On the same day, SAP also announced its preliminary results for the fourth quarter and year ended December 31, 2001. In the fourth quarter, revenues increased 7% over the same period last year to EUR 2.32 billion (See Figure 1 below). While product revenues in the fourth quarter rose 5% to EUR 1.6 billion, license revenues dropped 2% to EUR 1.03 billion from EUR 1.06 billion a year ago. Net income for the fourth quarter 2001, adjusted for the TopTier acquisition costs and the Commerce One impact, was EUR 319 million, a 13% drop compared to EUR 375 million in Q4 2000. In the quarter, revenues in the Europe, Middle East and Africa (EMEA) region increased 6% to EUR 1.2 billion and in the Asia-Pacific region (APA) revenues were up 8% to EUR 248 million. Even revenues in the Americas region rose 8% to EUR 864 million, and, at constant currency rates, revenues in the Americas would have risen 13%.

Figure 1:

Interesting, however, is the fact that the license revenue in the EMEA market was down 6%, whereby 15% in its domestic German market. Nonetheless, the Company claims to have continued to take market share in sales of specific software solutions. In Q4 2001, software revenues related to mySAP CRM (Customer Relationship Management) reached approximately EUR 196 million, representing 19% of total software license sales. Fourth quarter mySAP SCM (Supply Chain Management) related software revenues totaled around EUR 232 million, representing 23% of total software license sales.

Annual results were even more impressive. For 2001, sales grew 17% to EUR 7.34 billion, compared to EUR 6.27 billion in 2000 (See Figure 2 below). Still, net income for the year, adjusted for the TopTier acquisition costs and the Commerce One impact, dropped 6% to EUR 581 million. License revenues for 2001 rose 5% to EUR 2.58 billion, while consulting revenues grew 27% to EUR 2.08 billion and training revenue increased 16% to EUR 466 million. In 2001, sales in the APA region were up 9% to EUR 841 million, in the EMEA region, revenues increased 23% to EUR 3.8 billion and in the Americas, revenues rose 12% to EUR 2.7 billion. Still, for the entire year, the license revenue in the Americas market was down 5%, whereby 7% in the US. Over the year, software revenues related to mySAP CRM reached approximately EUR 445 million, representing 17% of total software license sales. Full year mySAP SCM related license revenues totaled around EUR 583 million, representing 23% of total software license sales. With these results the Company believes it has established itself as number one in the market for SCM software and a fast growing number two in CRM software.

Figure 2:

Despite impressive results, SAP expects 2002 to be another challenging year, as software sales trends continue to be unsettled in a tough economic environment. For the full year, SAP anticipates revenue to grow by around 15%, with stronger software license sales coming in the second half, in line with past quarterly developments.

Market Impact

One thing is certain SAP will remain an absolute applications leader for a long time to come, as it has performed well throughout the gloomy economic times. SAP's management should be pleased with the growth in all markets worldwide. As a matter of interest, SAP's prolonged tardiness in addressing the needs of erstwhile Internet revolution may now prove to have been a blessing in disguise. While the company has taken heat for looking hopelessly remiss during 1999/2000's 'dotcom' frenzy and for delivering a muddled initial product strategy, it has come back with a vengeance with the crash of the Internet hype. The much-touted partnership with Commerce One was possibly a last ditch effort for SAP solutions to catch up with its peer counterparts. It has more than served its purpose as SAP has not thereby invested much of its own resources to deliver applications for the Internet marketplaces revolution that never took place in earnest.

During the times of economic slump SAP seems to be reaping the struggling competitors' missed opportunities as well. During these times of risk-averse customers, SAP's aura of a stalwart vendor and its prudent approaches to solving customers' business problems have become even more attractive and assuring both to its huge customer base and to new prospects. However, it would not be fair to ascribe SAP's success only to the misfortunes of the others given that good fortune needs to be backed up with an astute execution, PeopleSoft being another case in point. SAP's current posture is also the result of several years of a painstaking effort to radically change its business philosophy, to reinvent itself into a more nimble setup, and to reverse bad market perception. The company has by and large made the right strategic decisions, as it seems to have finally got its ducks in the row it has embarked on making its proverbially unwieldy R/3 product more granular and open, it has to that end reorganized itself into more logical entities, and it has delivered attractive ERP-adjacent components.

It appears as though SAP's software solutions outside core ERP system can finally attract customers even beyond its install base on a stand-alone basis. After years of wavering, SAP's SCM, CRM and PLM applications seem to be comparable with the functionality of best-of breed specialists, which means a potential bonus revenue stream through new products and services. The above mentioned increasing percentages of revenue coming from these applications speak in that regard SAP is taking ever-bigger slices of, e.g., SCM and CRM pies. Today, companies are striving to shore up the existing technology and applications inside their organizations first, and only then to extend them outward to trading partners. SAP seems to be positioned well to oblige them in their endeavors. The above BI moves may also indicate that SAP has been espousing it as an enabler of understanding of business activity rather than a business activity-monitoring tool.

SAP has also been pursuing the right avenues to technologically prop up its product. Its recently unveiled Internet-based product architecture roadmap that includes Web services, portals, exchanges and Web Application Server (WAS) (see SAP Opens The 'Miss Congeniality' Contest), bundled with its knowledge of business processes bode well for promoting it into one of only a few vendors that will be able to provide applications infrastructure foundation (an enterprise equivalent of operational systems upon which other applications would be able to be grafted).

This concludes Part One of a two-part News Analysis of recent SAP announcements.
Part Two continues the market analysis and makes User Recommendations.

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